BI won't follow Fed in rate cuts

Berni K Moestafa, The Jakarta Post, Jakarta

Reflecting prevailing concerns over high inflation and the weakening rupiah, Bank Indonesia said it would maintain its high interest rates despite a 50 basis-point rate cut by the U.S. Federal Reserve.

Bank Indonesia Governor Sjahril Sabirin said on Wednesday that the bank had no intention of following the Federal Reserves' step in easing liquidity.

"We will act cautiously. For now, BI (has decided) not to reduce the interest rate. Instead, we are keeping the rate at the current level," Sjahril was quoted as saying by newswire AFX.

During Wednesday's auction, the Bank Indonesia one month promissory note rate edged slightly up to 17.59 percent from 17.57 percent a week earlier.

The increase followed as the Federal Reserve cut on Tuesday (early Wednesday in Jakarta) its overnight rate for the ninth time this year to 2.5 percent, the lowest level since 1962.

Factoring in the aftermath of last month's terrorist attack in the U.S., which has spooked investors in an already weak economy, the Fed hinted of more rate cuts to come.

But throughout the year, Bank Indonesia has distanced itself from the U.S. rate cuts, reasoning that domestic factors have more influence over the local economy.

By keeping interest rates high, the central bank hopes to ease pressure on the rupiah and avoid inflation from building up.

Experts have also said that lower domestic rates could trigger capital flight.

The rupiah has been sinking back to levels last seen when political instability began to grip the market early this year.

Back then, doubts over former President Abdurrahman Wahid's future and deteriorating security conditions edged the rupiah closer to the 10,000 level.

The unit fell quickly to the 11,000 level after it had breached the important psychological barrier of 10,000.

On Wednesday, the local unit closed at 9,915, or slightly higher than the day before when it had reached 10,025 per dollar.

However, Governor Sjahril said he expected the rupiah's weakness to be short-lived.

The central bank governor appeared to blame the weakness more on the sluggish global economy. But dealers said security concerns at home were contributing to the rupiah's woes.

Of chief concern is the growing anti-U.S. protests by local radical groups that could trigger mass capital flight.

Plans by the U.S. to retaliate for the Sept. 11 terrorist strike by attacking the alleged perpetrators in Afghanistan, have provoked these groups to threaten U.S. interests here.

As the rupiah weakens, so the inflation rate picks up.

After recording month-on-month deflation of 0.21 percent in August, inflation returned in September when it reached 0.64 percent.

Last month's rise in the consumer price index meant a year-on- year rate of 12.23 percent, dimming chances of holding inflation for the year to 9.3 percent as targeted by the government.